Fall 2004 Insurance Law Update

By Rebecca Raper

TEXAS SUPREME COURT

Northern County Mutual Insurance Company v. Davalos, 47 Tex. Sup. Ct. J. 786 (Tex. Jul. 2, 2004) (motion for rehearing pending)

A liability insurance carrier has the right to control the defense when there is not an otherwise “sufficient conflict” between the insurer's control of the defense and the “insured’s legitimate interests under the policy.”

The insured in Davalos refused its insurer's tendered defense because of a disagreement about where the case should be defended.  Northern County requested that Davalos instruct his personal attorneys to withdraw as attorney of record and allow the substitution of a lawyer chosen by the carrier.  It was made clear that the new attorney would attempt to try the case in a venue different from that preferred by the insured’s personal counsel.  Davalos' attorneys did not withdraw, but they did respond by letter rejecting Northern County's offered defense, advising that he considered Northern County's demands to be unconscionable and actionable.

Reviewing these facts, the Texas Supreme Court found that, absent a conflict of interest between the insured and the insurer, an insurer’s right to conduct its insured's defense is a matter of contract. The Court concluded that “every disagreement about how the defense should be conducted cannot amount to a conflict of interest.  If it did, the insured, not the insurer, controls the defense by merely disagreeing with the insurer's proposed actions.”  The Court further noted, "of course, it is difficult to imagine a set of circumstances in which a choice of venue might amount to a disqualifying conflict of interest. . . . The choice of venue should ordinarily have no impact on the insured's legitimate interests under the policy." 

The decision also acknowledged the disagreement among lower courts about whether the penalty provisions of Article 21.55 of the Insurance Code apply to the duty to defend.  However, the Court found that it was unnecessary to decide the Article 21.55 issue because Northern County had timely tendered a defense to its insured; thus, no penalty was possible, even if Article 21.55 did apply.

FIFTH CIRCUIT COURT OF APPEALS (FEDERAL)

See Northfield Ins. Co. v. Loving Home Care, Inc., 363 F.3d 523 (5th Cir. 2004).

The use of extrinsic evidence will be rarely allowed in determining a duty to defend and never to establish the applicability of a coverage exclusion.  

In Northfield, a coverage dispute arose over the insurer’s duty to defend the insured nanny business from a negligence suit for the death of a child in the care of one of its employees.   With regard to whether extrinsic evidence could be specifically used to determine whether the policy’s “criminal acts” and/or “physical abuse” exclusions applied to preclude coverage, the Fifth Circuit noted that “[t]he Texas Supreme Court has never recognized any exception to the strict eight corners rule that would allow courts to examine extrinsic evidence when determining an insurer’s duty to defend.”  The Fifth Circuit went on to explain that “in the unlikely situation that the Texas Supreme Court were to recognize an exception to the strict eight corners rule,” such exception would be very limited.  Specifically, the Fifth Circuit predicted that the Texas Supreme Court would not allow extrinsic evidence to establish a policy exclusion. 

TEXAS COURTS OF APPEALS

Global Sun Pools, Inc. v. Burlington Insurance Co., 2004 W.L. 878283 (Tex. App. – Dallas April 26, 2004, no pet. h.).

Additional insured is entitled to defense in spite of lack of specific allegations against named insured.

Global Sun Pools, Inc. was sued after a pool deck it contracted to build collapsed.  The plaintiffs broadly alleged that Global sent “its builders to construct the pool and deck.”  In fact, Global had sent a subcontractor to construct the pool and deck. Global was listed an additional insured under a policy issued to that subcontractor, but only as to liability arising out of the activities of the subcontractor.   The subcontractor’s insurer denied Global’s request for a defense, arguing that the pleadings showed no relationship between the claims and the operations of the subcontractor.

In finding a duty to defend, the court asserted the principle that when there is any doubt as to whether a petition against an insured states a cause of action within coverage, the doubt must be resolved in favor of the insured.   Accordingly, the court held: “Global was an additional insured as to liability arising out of Simmons’ activities as an installer of above-ground pools.   The Reeds’ petition referred to Global and ‘its builders.’ Interpreting the matter liberally and resolving all doubts in the insured’s favor, we conclude the language of the petition and the insurance policy create the potential for a case under the complaint within the coverage of the policy.”     

Roman Catholic Diocese of Dallas v. Interstate Fire & Casualty Co., 2004 W.L. 1098831 (Tex. App. – Dallas May 18, 2004, no pet. h.)

The existence of an occurrence is determined from the standpoint of the insured, even where a policy does not contain a separation of insureds provision. 

The Catholic Diocese of Dallas sought coverage for a lawsuit alleging that one of its priests sexually molested parishioners.   The Diocese was sued under a number of theories, including respondeat superior; negligent hiring, retention, and supervision; failure to warn; breach of fiduciary duty; etc.  Claiming that the Diocese’s negligence was “inextricably intertwined” with the priest’s intentional acts, the Diocese’s insurers argued that there was no “occurrence,” and, thus, no coverage for the claims.  The Diocese, on the other hand, asserted that the priest’s intent could not be imputed to the Diocese in determining whether there had been an “occurrence.” 

The court examined the Texas Supreme Court’s Opinion in King v. Dallas Fire Insurance Co., 85 S.W.3d 185 (Tex. 2002), wherein the standard “separation of insureds” clause was held to require that the occurrence question be resolved as to each insured from the standpoint of that insured.  Thus, the insured business owner was owed a defense when sued for his employee’s intentional act.  Examining the King opinion, the court held that there was sufficient historical reference to determine that the “separation of insureds” provision the King court examined merely “makes express what was previously implied in the law.”  That is, the court expressly held that with or without a “separation of inaureds provision,” whether an “occurrence” exists must be determined from the standpoint of each insured.

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